The Y&H

“Good afternoon. Ahead on CITYpulse News… Toronto is suffering a condo crash. The warning from experts is that the building boom and a market slowdown hit the GTA in the worst possible way… and new research reveals that slouching is not just bad for posture, it’s also bad for your mental health….”

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Another day (what election?). Another news cycle. Global TV in Vancouver and CITY in Toronto discover crumbling condos within hours of their two newscasts. Reuters moves a story picked up by scores of publications and sites. “Canada braces as housing slowdown takes hold,” is the headline at Fox News. And as I told you last week, even the Wall Street Journal’s jumped onto the trash-Canadian-housing meme with a story days ago guaranteed to keep rich investment bankers safely on their side of the border.

At some point, which is probably now, all this becomes a self-reinforcing event. Real estate can’t function without investor confidence, and when people perceive that other people are getting freaked at housing risk, it’s over. Market momentum turns negative, sales slump and in due course prices follow.

For some time this pathetic blog has told you it was coming, although the unwinding is still in its formative stages. Media will push that ahead, but it’s not until soccer moms or your idiot relatives start yakking about how the ‘smart people’ are selling or downsizing that it will fully flower. That’ll take a few more months, then the price plop.

No group will be more devastated than the Young & Horny. Five per cent down payments, cash-back mortgages, high-ratio insurance, Ottawa’s first-time homebuyer tax credit, zero-down and 40-year ams, the BC First-Time New Home buyer’s Bonus and the RRSP Home Buyer’s Plan have understandably made these people think The Man wanted them to go crazy with property. Pimping right along have been the big banks, all pouring out guides and incentives along with fat mortgage pre-approvals. And how could we forget Tube Top Sandra and her little Property Virgins? (“I’m lovin’ the crown mouldings, Sandra…”)

Last year more than half of all real estate transactions were by first-time buyers. That number was just 36% in 2008, catapulting to 43% the next year when emergency rates came into effect, and has been inching ahead since. At the same time, average down payments have been collapsing, and now average just 7% of the purchase price. As Canadian mortgage debt soared past the trillion-dollar mark two years ago, it was largely on the backs of the young and inexperienced, talked into stunning leverage by realtors, bankers, politicians and their fool parents.

Now, the cruel joke. After doing exactly what society was pushing them to, the kids are being hung out to dry. Forty-year amortizations have turned into 25. Cash-back mortgages which eliminated the need for a down payment have themselves been snuffed. Debt-service ratios have been hiked making borrowing harder. And the elfin deity himself, F, has been warning darkly about too much debt while central bankers tell everyone to stop buying houses and save and invest instead.

All this has worked. Condo sales have crashed. Listings are piling up and first-time sellers wonder what the hell just happened. Wasn’t this stuff supposed to go up forever? We’re now just months, or weeks, away from tens of thousands of young real estate ‘owners’ in Toronto alone being seriously under water. One year ago, that was unthinkable.

This week 90% of people aged 18 to 24 told pollsters for Sun Life that they have “excessive stress” because of economic uncertainty. That compared with a mere 72% of the larger population who say they are “uncomfortably stressed” because of the economy. Crappy youth employment numbers and burger wages for MBAs are a big part of the reason for the Y&H jitters, but at the heart of it all is an old foe. Debt.

Seems a lot of property virgins thought they had an answer to this – ignore it. Instead of worrying about the big steaming pile of borrowed money, just focus on the monthly. As long as that’s manageable, no problem, since inevitable gains in real estate equity will wipe out the debt when you decide to walk.

F and his minions put an end to that on July 9th. Toppling sales in the fast-flipping condo market have meant a flood of supply over demand, mounting illiquidity and an end to rising values. Those brand new sellers now find if they want a deal they have to bail for less than ‘market value’, which is exactly what’s happening. In some of the glass towers in downtown Toronto, little units fetching over $300,000 eight months ago have lost almost 20% of their value. If you bought one with 5% down, wouldn’t you be stressed, too?

1 Comment for “The Y&H”

Another side effect of high house prices in Toronto seems to be that those high prices are helping to kill off jobs. For example, there’s an article in today’s news about Mr. Christie’s Cookie factory shutting down because of “changes in the surrounding neighbourhood”. It sounds like a lot of businesses are worth more dead than alive. The business can be bulldozed and replaced by expensive houses.

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Garth Turner

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics.
Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.